With Mark Carney's exit, what does the Bank of Canada do again?

With Mark Carney's exit, what does the Bank of Canada do again?

In this occasional feature, the National Post tells you everything you need to know about a complicated subject. Today, Kathryn Blaze Carlson looks at Mark Carney stepping down as Bank of Canada Governor and his new appointment to Britain’s central bank.

Q.What is the Bank of Canada?

A. First, what it is not: It is not a commercial bank and does not offer banking services to Canadians. Instead, it is a central bank whose clients include the federal government, other central banks, commercial banks and certain other financial institutions. Born out of the Great Depression in the 1930s, the bank now has offices in Ottawa, Vancouver, Calgary, Toronto, Montreal and Halifax and retains its original mandate to “promote the economic and financial welfare of Canada.”

Q.What, exactly, does it do?

A. Its most visible job (the one most Canadians know it for) is managing this country’s monetary policy — deciding how much money circulates in the economy and keeping an eye on what that money is worth. The bank’s cornerstone is inflation-control, specifically keeping inflation at 2% or at least somewhere between 1% and 3%. Eight times a year, the bank announces whether it is raising the interest rate to cool off the economy and control demand or lowering the rate to stimulate the economy. The bank manages the federal government’s accounts by collecting revenues and distributing money to cover off expenses, making sure there is enough cash in government coffers to cover daily spending. Its governing council offers policy advice to Ottawa on how to management the nation’s debt and, when necessary, selling securities to financial market dealers. The bank also designs and prints cash (remember the controversy over the Asian woman being removed from $100 notes this summer?), works with law officials to deter counterfeiting, acts as a lender of last resort, and manages foreign exchange reserves.

A. The governor, in this case Mark Carney, is the bank’s chief executive officer and enjoys full control and authority over the Crown corporation. He is the head of the Board of Directors, which offers general oversight on the bank’s strategic planning and internal policies, and is a member of the six-person Governing Council, which is the policy-making arm that decides when and whether to raise interest rates and print money. Mr. Carney, for his part, has kept interest rates near historic lows over the past several years to spur the economy post-recession. The Bank of Canada Act demands that the governor meet and consult regularly with the Finance Minister on monetary policy. If the two disagree on something profound, the minister can go above the governor’s head and make a policy change — although that has never happened.

Q.How did Mr. Carney get the job in the first place?

A. The Finance Minister, in this case Jim Flaherty, appoints directors to fill vacancies on the board for a three-year term. That board then appoints a governor and senior deputy governor, with the approval of the Governor in Council. Mr. Carney started on Feb. 1, 2008, and was supposed to serve a seven-year term but will instead leave on June 1, 2013. The governor must be a Canadian citizen, unlike Mr. Carney’s new gig at the Bank of England, where there are no such citizenship requirements.

Q.Why doesn’t the governor just print enough money to pay off Canada’s growing national debt?

A. “Because doing so would reduce the value of our money, raise interest rates, and undermine the growth of our economy — the exact opposite of our goals,” the bank’s website says. By repaying the debt and financing government programs, loads more money would make its way into circulation, which would encourage people to spend more in the short term. But in the longer term, demand would grow faster than supply, eventually causing ramped-up inflation.

Q.Who owns the bank?

A. In 1938, the bank became a Crown corporation and has belonged to the federal government ever since. Still, it operates at arms-length, allowing for the “separation of the power to spend money from the power to create money.” As for the bank’s finances, institutions such as commercial banks pay the Bank of Canada when they withdraw money from it. The bank then invests that money in government bonds and treasury bills, earning interest that then becomes the bank’s main revenue source.

Q.What’s the international buzz about Mr. Carney’s appointment to the Bank of England?

A.The Wall Street Journal called Monday’s news a “bombshell” announcement, saying Mr. Carney marks a “surprise pick that underscores U.K. officials’ thirst for fresh blood at the powerful institution.” The Daily Mail said Chancellor of the Exchequer George Osborne “stunned” the House of Commons because most predicted the job would go to the current deputy governor, Paul Tucker, or at least to a Brit. Mr. Carney will be the first non-Brit to fill the post, although he has deep connections there having studied at Oxford and married a British woman. “He is quite simply the best, most experienced and most qualified person in the world to do the job,” Mr. Osborne said in defending the pick. The Guardian, meantime, ran a live blog on the announcement and highlighted British MPs concern over his citizenship. To that, Mr. Osborne said, “Canada is a G7 country. It’s one of our allies…. It’s hard to think of a closer ally than Canada.” The Daily Mail also reported Mr. Carney will seek British citizenship even though it is not a requirement.

Q.Were Canadians surprised?

A. Absolutely. As recently as August, Mr. Carney said he was not running — and would never run — for the Bank of England governorship. “This is highly unexpected and quite shocking because he had [taken] himself out of the running for the job,” Queen’s University banking expert Louis Gagnon said in a release. Mr. Carney was also rumoured for the Liberal Party leadership, but he shot down that speculation in 2011 when he said he was not considering a career in politics.

Q.Who will succeed Mr. Carney?

A. Unclear. But in its statement Monday, the bank said the board of directors will strike a Special Committee to recruit the next governor “shortly.” Whoever it is will have big shoes to fill: Mr. Carney was renowned for his ability to explain complex financial issues and connect with Canadians. “People in the subway were stopping me and asking me about the Bank of Canada forecast,” leading Canadian economist Don Drummond told the Walrus magazine in 2009. “It’s amazing — they’re really engaged. What a sea change for this organization.” Mr. Carney, meantime, will succeed Mervyn King and will start his new gig on July 1, 2013, where he will serve for five years instead of the typical eight-year term.

Q.How do the Bank of England and the Bank of Canada compare?

A. At 78-years-old, the Bank of Canada is considerably younger than the 318-year-old Bank of England, also known as the “Old Lady” of Threadneedle Street. Mr. Carney’s future employer is preparing to become the most powerful central bank in the world as it absorbs broad new powers to oversee the financial system and prevent another crisis. On top of setting interest rates and shaping the country’s monetary policy, the bank will “assume responsibility for regulating the U.K.’s massive banking and financial system,” according to The Wall Street Journal. The Bank of Canada, meantime, does not directly regulate Canadian banks or credit unions. Mr. Carney will also have to guide the Monetary Policy Committee as it works to stoke recovery and protect the bank’s credibility since earning independence back in 1997. Like the Bank of Canada, the Bank of England keeps a 2% inflation target.